Study estimates $2 million a month in Bitcoin drug sales

Revenues of the drug marketplace Silk Road have doubled since March.

We've noted before that the cryptocurrency Bitcoin has been adopted enthusiastically by those engaged in legally dubious pursuits like gambling and drug purchases. Forbes points us to a new study that backs up this proposition with hard data.

Nicolas Christin, a researcher at Carnegie Mellon, monitored the online marketplace Silk Road over a period of months. The research turned up some striking statistics about the volume and distribution of transactions made on the secretive site, which primarily facilitates drug deals.

Silk Road sellers have collectively had around $1.9 million of sales per month in recent months. Almost 1,400 sellers have participated in the marketplace, and they have collectively earned positive ratings from 97.8 percent of buyers. And the service is growing, with Silk Road's estimated commission revenue roughly doubling between March and July of this year.

Traveling the Silk Road

Silk Road is an online marketplace that uses Tor and Bitcoin to preserve the anonymity of all involved. The site itself is set up as a Tor hidden service, which makes it practically impossible to locate the site's servers. And the use of Bitcoins prevents the authorities from identifying market participants by following the money.

Most of the items listed for sale are illegal drugs. To place an order, the buyer transmits the appropriate number of Bitcoins to the site operators, who hold the funds in escrow while the goods are shipped. Once the buyer confirms the product has arrived, the escrowed funds are released to the seller.

Christin began crawling Silk Road in November 2011. From February to July of this year, he attempted to crawl the site on a daily basis, yielding a wealth of data about activity on the site.

Silk Road buyers are required to provide feedback on their purchases, and these reports are publicly available. This gave Cristin a handy way to track the volume of activity on the site. He reports that the volume of transactions on the site increased "from approximately 8,000 BTC/day to approximately 15,000 BTC/day, before seemingly retreating down to 11,000 BTC/day. The latter decrease is, however, an artifact of the Bitcoin sharply appreciating against all major currencies, rather than an indication of a drop in sales."

The growing volume of transactions has been lucrative for whoever operates the site. Christin estimates that Silk Road's operator earned an average of $143,000 per month during the period he was monitoring the site. And revenues have been increasing rapidly:

Enlarge/ Estimated revenues of Silk Road operator. Silk Road switched fee schedules partway through the study, so Christin estimated revenue that would be generated under either scheme.

Satisfied customers

In total, Cristin found 24,422 items available for sale. The online marketplace is dominated by drugs that are illegal in the United States and most other jurisdictions. Marijuana and related products topped the list, accounting for more than 20 percent of items available. Prescription drugs accounted for another 15 percent of the items. "Harder" drugs, including cocaine, ecstasy, and heroin, were also available, but they were much less common than marijuana.

All these transactions are being generated by a relatively small number of merchants. Christin observed 1,397 distinct sellers over the months he observed the site, but many of the sellers only stuck around for a short period. Just 58 sellers were offering their wares for the entire period of the study.

Sellers who disappear from the site's public listings haven't necessarily abandoned the site completely. Silk Road allows sellers to operate in "stealth mode," serving customers on an invitation-only basis. Cristin speculates that some sellers pop up on the site, spend a few weeks building up a customer base, and then switch to stealth mode to continue serving the customers they already have. That means Cristin has likely understated the true volume of transactions on Silk Road.

Fraud does occur, though. In one case, a seller who had previously had a good reputation cut his prices by 20 percent in order to generate a large volume of sales, and then disappeared from the site without delivering the products customers had ordered. Because Bitcoin transactions are irreversible, those buyers that had already released their funds from Silk Road's escrow service found themselves out of luck.

Still, most sellers appear to be behaving themselves. On a five-star rating scale, 96.5 percent of buyers gave five-star ratings, and 1.3 percent gave four-star ratings. Just 1.1 percent gave the lowest rating of one star.

So far, the world's law enforcement agencies don't appear to have done much to combat Silk Road's growth. Two weeks ago Australian government officials bragged about catching one Silk Road user, but that arrest represents a tiny fraction of the tens of thousands of transactions the site has facilitated.

So Silk Road takes a cut by offering said escrow service, but it's setup in a way to still allow people to get ripped off? How is this better than a direct transaction? I'd be such a bad criminal.

It's setup if people release the escrow before they get their product. Basically, the users were stupid. The whole point of an escrow is to wait until you actually get the product or service before releasing it.

...those buyers that had already released their funds from Silk Road's escrow service found themselves out of luck.

Say what? What's the point of escrow if you're going to release the funds even if your package hasn't arrived? Either the buyers made a huge mistake or there's something more to the disappearing seller scam than I'm getting from the article.

So Silk Road takes a cut by offering said escrow service, but it's setup in a way to still allow people to get ripped off? How is this better than a direct transaction? I'd be such a bad criminal.

Sellers can ask that a buyer finalize the transaction and release funds from escrow before the item is shipped. There are lots of reasons to do this- to avoid being scammed by a buyer with no transaction history (who could just pretend it never arrived), or simply to have funds for restock. If we have 60 sellers with, say, even just 50% of the market share, and 1.9 million per month passing through the market, and shipping times of 1-2 weeks... that's around $5,000 in escrow for an average seller. The highest volume sellers could have as much as $20,000 caught up in escrow, so some sellers with high volume and great reputation might ask all shipments below a certain amount be finalized early.

And it's better than a direct transaction even without escrow, because on the Internet your chances of getting shot go way down. In person, not so much.

So Silk Road takes a cut by offering said escrow service, but it's setup in a way to still allow people to get ripped off? How is this better than a direct transaction? I'd be such a bad criminal.

It's setup if people release the escrow before they get their product. Basically, the users were stupid. The whole point of an escrow is to wait until you actually get the product or service before releasing it.

Not if they're new buyer accounts or buyer accounts under a certain number of transactions. In that case, they have to agree to release the funds first for the seller to actually ship the product. Once the buyer has established themselves as..well..a consistent buyer, then they can choose to hold the funds until the product has arrived.

"Sellers can ask that a buyer finalize the transaction and release funds from escrow before the item is shipped. There are lots of reasons to do this- to avoid being scammed by a buyer with no transaction history (who could just pretend it never arrived),"

This confuses me. The whole point of an escrow is to remove the buyer's incentive to do that. In a normal escrow, the funds aren't released to either party without the other party's consent. Has Silk Road gotten it wrong, or are Silk Road sellers getting it wrong? Or is the problem really that buyers are just too lazy to release escrows, rather than actually trying to rip somebody off? Or are there just a bunch of "griefer" buyers? Or what?

"or simply to have funds for restock. If we have 60 sellers with, say, even just 50% of the market share, and 1.9 million per month passing through the market, and shipping times of 1-2 weeks... that's around $5,000 in escrow for an average seller.""

Only having 1-2 weeks of outstanding receivables sounds pretty good... and I suspect we're talking about a pretty high margin business here. Sounds like maybe some sellers aren't very realistic about managing their cash flow. And if you're doing $40,000 per month, you really should be able to be realistic.

I just don't understand how a market like that can ever work without extremely strict escrow discipline...

So Silk Road takes a cut by offering said escrow service, but it's setup in a way to still allow people to get ripped off? How is this better than a direct transaction? I'd be such a bad criminal.

It's setup if people release the escrow before they get their product. Basically, the users were stupid. The whole point of an escrow is to wait until you actually get the product or service before releasing it.

Not if they're new buyer accounts or buyer accounts under a certain number of transactions. In that case, they have to agree to release the funds first for the seller to actually ship the product. Once the buyer has established themselves as..well..a consistent buyer, then they can choose to hold the funds until the product has arrived.

Could we get increases in Silk Road traffic graphed against frequency of mention in major news sources and stories, print and online. I can't help but think bad (free) press is good press for such an endeavor.

Gizmodo's over-hyped, "buy any gun you want expose" must have really gotten them a boost of fresh users.

I completely agree with this post. Marijuana is less addictive than nicotine, and should be legalized, regulated and taxed. It would produce a safer product, generate tax revenue, and frankly take some of the mysticism away from using the drug.

I completely agree with this post. Marijuana is less addictive than nicotine, and should be legalized, regulated and taxed. It would produce a safer product, generate tax revenue, and frankly take some of the mysticism away from using the drug.

I get a bit annoyed when I hear the latter statements in your post. I could care less if marijuana was legalized, but it's tiring to hear the "safer than nicotine" statement. There are ways marijuana/THC is less dangerous than tobacco/nicotine and ways in which it is more dangerous. If the legalize crowd would stop that part of the argument and just seek legal and social parity with tobacco, they would probably find they have an easier time. While I would agree that driving stoned is typically safer than drunk, again enough of society would prefer legal parity with alcohol DUI/DWI laws such that driving stoned would be in the same classification.

The legalize marijuana movement, limited as it may be, seems a bit silly against the backdrop of the last 10-15 years of cigarette smoking demonization.

I believe people release funds early in order to get discounts. Obviously that's a dumb idea but so is having weed delivered to your home address. It's only a matter of time until this blows up. I know that TOR is pretty secure and all that, but nothing is 100% secure. I'd guess that there are already investigations going on into the major suppliers on the site.

"Marijuana and related products topped the list, accounting for more than 20 percent of items available."

I wish the US would wake up. This is all potentially taxed goods for sale that have no harmful effects that exceed alcohol or tabacco usage.

Illegal substances remain illegal because the current system is already profitable, for both law enforcement and organized crime. Take it away and you'll have both sides at your throat (one with political shenanigans, the other with death threats).

So, let's roleplay for a minute. We're DEA/FBI/POTUS (you choose). How do we shut this network down? A couple ideas:

1) Hack the silkroad site itself, and locate the admins. Just because the site is on Tor, that doesn't mean it's invulnerable to attacks. I'm sure the US government could find enough talent to break in.

2) Shut down the bitcoin exchanges. The whole bitcoin drug industry relies on being able to exchange BTC with USD (or other currencies). I don't know what legal argument would be deployed here, but I'm sure that some plan could be constructed; if there are no legal grounds to ban bitcoin exchanges, the government could just lean on the banks to stop processing transactions for the top exchanges, as they did for donations to Wikileaks.

These seem to me to be the most vulnerable parts of the system. Thoughts?

I believe people release funds early in order to get discounts. Obviously that's a dumb idea but so is having weed delivered to your home address. It's only a matter of time until this blows up. I know that TOR is pretty secure and all that, but nothing is 100% secure. I'd guess that there are already investigations going on into the major suppliers on the site.

The sellers and buyers are completely isolated from the site though. You can't even access the site without using Tor. And while the seller of course doesn't ever divulge his/her private details to anyone, the buyer uses PGP to encrypt their address to the seller.

So the site administrators has no clue by nature as to who purchases or sells drugs on the site.

Seems to me you could set up a sting on the Silk Road. How do they know if you are a real drug dealer?

Why would Silk Road care if you're a real drug dealer?

Luring in customers as a fake seller would be kinda hard, since buyers communicate through the attached forum and the site itself. The undercover sting would first have to send out real drugs in small samples to buyers (would that be possible?) to get any reputation. And following that the operation would have to make some larger fake sells, but where would it go from there?

The sting would then have addresses all over the world from people who wanted to purchase drugs, then what? Ignoring that most of the addresses are anonymous dumpsites, and in variuous countries outside their jurisdiction, there's still burden of proof.

The buyer could just deny having ordered any drugs. And you wouldn't be able to prove otherwise, thus achieving nothing.

So, let's roleplay for a minute. We're DEA/FBI/POTUS (you choose). How do we shut this network down? A couple ideas:

1) Hack the silkroad site itself, and locate the admins. Just because the site is on Tor, that doesn't mean it's invulnerable to attacks. I'm sure the US government could find enough talent to break in.

2) Shut down the bitcoin exchanges. The whole bitcoin drug industry relies on being able to exchange BTC with USD (or other currencies). I don't know what legal argument would be deployed here, but I'm sure that some plan could be constructed; if there are no legal grounds to ban bitcoin exchanges, the government could just lean on the banks to stop processing transactions for the top exchanges, as they did for donations to Wikileaks.

These seem to me to be the most vulnerable parts of the system. Thoughts?

You must be new here. 1) The government can't control the sale and distribution of illegal drugs any more than they could control the production, sale and distribution of alcohol during the prohibition days. If they could, there would be no alcohol for sale today nor any illegal drug problem. Hacking Silk Road won't change anything, even if they could do so (doubtful).2) Shutting down a bitcoin exchange will be about as effective as shutting down a bittorrent tracker. Shut down one and another will spring up to replace it. Furthermore, most of these exchanges are either on the darknet or hosted in other countries (Mt.Gox is in Japan, Intersango is in the UK, etc.) Aside from the occasional (and very rare) SWAT operation against MegaUpload, the U.S. government hasn't much legal justification for shutting down businesses operating legally in other countries.3) Bitcoin is a peer-to-peer network with nodes located all over the world. The U.S. cannot even shut down the nodes hosted within their borders, and can do nothing at all to any nodes located outside their borders.

Of course, none of this suggests they won't continue to try, but it seems that politicians, like the movie and music moguls, have learned nothing about technology since the glory days of Napster and the Pirate Bay. Worldwide movements cannot be stopped by a single government, particularly one as incompetently run as the United States. I'm from Italy, so I can't brag about my own government either.

I wonder how much of that trafic is actual, and how much is fake. Any good scam would start with fake buyers giving good marks to fake seller for a month, and putting people into a queue with claim " We cant serve any more customers at the moment", and when the queue was big enough scam them out of money and disappear into the void.

If they add claim that at the pickup point they got the marks picture, and will send it to police if they call out the scam, most of the scamming wont even be reported.

There's a chance even police is doing that, trying to pose as big time dealer and trying to get some suplier intrested into offering them drugs.

Well ya see, Norm, it's like this. A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Excessive intake of alcohol, as we know, kills brain cells. But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine. That's why you always feel smarter after a few beers.

I completely agree with this post. Marijuana is less addictive than nicotine, and should be legalized, regulated and taxed. It would produce a safer product, generate tax revenue, and frankly take some of the mysticism away from using the drug.

I get a bit annoyed when I hear the latter statements in your post. I could care less if marijuana was legalized, but it's tiring to hear the "safer than nicotine" statement. There are ways marijuana/THC is less dangerous than tobacco/nicotine and ways in which it is more dangerous. If the legalize crowd would stop that part of the argument and just seek legal and social parity with tobacco, they would probably find they have an easier time. While I would agree that driving stoned is typically safer than drunk, again enough of society would prefer legal parity with alcohol DUI/DWI laws such that driving stoned would be in the same classification.

The legalize marijuana movement, limited as it may be, seems a bit silly against the backdrop of the last 10-15 years of cigarette smoking demonization.

How dare you, good sir! Marijuana does not elevate heart rate and put its users at an increased risk of heart attack while high despite the 'mellow' feeling. It does not make anxiety disorders worse in the long term. It is not harmful to light on fire and suck it in to one's lungs. Long term chronic use at levels similar to self medication with alcohol does not have any permanent detrimental effects. Don't wikipedia it.

GOOD DAY TO YOU SIR! (Sorry, am just picking on you, Aaron.)

(Full disclosure: Pot does all of the things I just said it didn't do. Wikipedia it.)

This is just another example of bitcoins acting a lot like cold hard cash, just digitally instead of paper. Both have similar benefits and drawbacks, though bitcoins don't have the luxury of being considered infallible like USD.

So much of this is based on perceived stability, that posting a high profile article questioning its stability influences it. If we think it'll fail, it'll probably fail. I'm uninvested but hopeful. I think it'll steadily gain over time as more people become comfortable with it and software matures around it. Any radical gains don't reflect the slow crawl that something like this needs.

Timothy B. Lee / Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times.